Court’s Decision
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, dismissed the Revenue’s appeal challenging the Commissioner of Income Tax (Appeals) [CIT(A)]’s order deleting a ₹16,62,79,849 disallowance made under Section 40(a)(ia) of the Income Tax Act, 1961. The disallowance had been made on the ground that the assessee failed to deduct tax at source (TDS) under Section 195 on mobilization fees paid to a foreign company. The Tribunal held that since the mobilization services were rendered entirely outside India, the income could not be deemed to accrue or arise in India, and therefore, there was no liability to deduct TDS.
Facts
The assessee, a foreign company engaged in offshore drilling services for oil exploration in India, entered into a contract with an Indian entity to provide shallow-water drilling operations. Under the contract, the assessee was entitled to mobilization and demobilization fees for transporting the drilling rig to and from the location in Indian waters.
During assessment proceedings, the Assessing Officer (AO) noted that the assessee had paid a lump-sum mobilization fee to another foreign entity for transporting the rig to India without deducting TDS under section 195. The AO held that these payments were taxable in India under the deeming provisions of section 9(1)(i) and the special presumptive taxation regime under section 44BB, and accordingly disallowed the expenditure under section 40(a)(ia) for non-deduction of TDS.
The assessee contested the disallowance, arguing that the mobilization activity occurred entirely outside Indian territorial waters, prior to the commencement of operations in India, and hence was not taxable in India. The CIT(A) accepted this contention, leading to the Revenue’s appeal before the ITAT.
Issues
- Whether mobilization fees for transporting a drilling rig to India constitute income deemed to accrue or arise in India under Section 9(1)(i).
- Whether such payments are taxable under the presumptive provisions of Section 44BB.
- Whether failure to deduct TDS under section 195 justified disallowance under Section 40(a)(ia).
Petitioner’s Arguments (Revenue)
The Revenue argued that mobilization fees were an integral part of the drilling contract, directly linked to the exploration and extraction activities in India. By virtue of Section 44BB, which applies to non-resident service providers in oil exploration, all amounts paid under the contract — including mobilization — must be included in the gross receipts for taxation purposes.
It was contended that the situs of the payment, its contractual purpose, and its link to Indian operations established a sufficient business connection with India under Section 9(1)(i). As the assessee failed to deduct TDS under Section 195, the AO’s invocation of Section 40(a)(ia) to disallow the expenditure was justified.
Respondent’s Arguments (Assessee)
The assessee submitted that the mobilization activity was wholly executed outside India before the rig entered Indian waters. The fee was a fixed contractual sum, unrelated to the distance covered within India. Relying on judicial precedents, the assessee argued that under Section 9(1)(i) and Section 44BB, only receipts attributable to operations carried out in India are taxable.
It was emphasized that the principle of territorial nexus — as recognised in Ishikawajima-Harima Heavy Industries Ltd. v. DIT — mandates that offshore activities without physical operations in India cannot be taxed. Consequently, Section 195 did not apply, and without a taxable event, Section 40(a)(ia) disallowance could not be sustained.
Analysis of the Law
Section 9(1)(i) deems income to accrue in India if it arises from a business connection in India. Section 44BB provides a presumptive taxation mechanism for non-residents providing oilfield services, computing income as 10% of gross receipts. However, courts have consistently held that only receipts related to services performed in India are taxable.
The AO’s approach conflated contractual linkage with territorial nexus. However, under established jurisprudence, the mere fact that a payment relates to a contract involving Indian operations does not, by itself, bring offshore activities into the Indian tax net.
Precedent Analysis
- Sedco Forex International Drilling Inc. v. CIT – Held that mobilization charges for work done outside India are not taxable in India.
- B.J. Services Co. Middle East Ltd. v. DIT – Clarified that only amounts attributable to Indian operations form part of gross receipts under section 44BB.
- Ishikawajima-Harima Heavy Industries Ltd. v. DIT – Affirmed that a territorial nexus is essential before taxing offshore services.
These cases underscore that the Indian tax regime cannot extend to purely offshore activities lacking physical presence or operational linkage to India.
Court’s Reasoning
The Tribunal noted that the mobilization fee was contractually fixed and calculated without reference to the actual distance covered within India. All mobilization work occurred outside Indian territory before the drilling rig’s arrival. The payment was, therefore, entirely attributable to offshore activities.
Relying on Sedco Forex and B.J. Services, the Tribunal held that only receipts from operations in India could be brought under section 44BB. Since the mobilization fees in question lacked any territorial nexus with India, they were not taxable. Without taxability under section 195, there was no legal basis for disallowance under section 40(a)(ia).
Conclusion
The ITAT dismissed the Revenue’s appeal, confirming that offshore mobilization fees are not taxable in India when the services are wholly performed outside Indian territory. The decision reinforces the principle that taxation must follow the actual situs of the income-generating activity and not merely the contractual connection to India.
Implications
This ruling strengthens the position of foreign contractors in the oil and gas sector by clarifying that payments for offshore mobilization are outside the scope of Indian taxation absent a direct territorial nexus. It limits the Revenue’s scope to invoke section 44BB for such payments and provides contractual certainty for cross-border oilfield services.
FAQs
Q1. Are mobilization fees always taxable under section 44BB?
No. Only portions attributable to services in India are taxable; purely offshore mobilization is excluded.
Q2. Does section 195 apply to all payments to non-residents?
No. TDS under section 195 is applicable only if the payment is chargeable to tax in India.
Q3. Can section 40(a)(ia) disallowance apply without proving taxability?
No. Without establishing that the payment is taxable in India, disallowance under section 40(a)(ia) cannot be sustained.
